Gold: All that Glitters?
New York: October 05, 2003
By John R. Stephenson

It never fails. In every group of investors there is one
- a gold bug, someone who thinks that gold is going to hit
$800 an ounce. But what casual observers might not realize
is that gold has been on a fairly steady climb northward over
the last several years. Gold finished the week at $385.40
(U.S.). Is this strength warranted and can the glimmering
metal continue its ascent in the face of strengthening stock
markets? Is the run in the price of gold over with? Should
you continue to sit on the sidelines or is there still some
further room to go on the upside?

Figure 1: The Price of Gold

Gold has historically been a store of value and a haven for
investors during uncertain times. This is because gold, as
opposed to monetary instruments, is a hard asset. For centuries,
gold has been used first as a currency and then later until
the 1970’s as a reference value for currencies. Today,
gold floats on the open market and is subject to the forces
of supply and demand. Historical evidence indicates that gold
tends to do well in times when the major world economies are
reflating (trying to boost demand). In order to boost demand
(reflate), central banks and policy makers create conditions
likely to stimulate demand. These conditions include: low
or negative real rates of interest, rapid money supply expansion
and fiscal stimulus, budget deficits and currency devaluation.
These conditions are extremely favorable for stronger gold
prices. Clearly, the situation in the U.S. and Western Europe
is just that - relationary.

Figure 2: The U.S. Dollar and Gold

Figure 3: Money Supply and Gold

With the world’s major economies facing a chronic oversupply
of goods and services, enormous debt burdens (both at the
corporate and individual level) and looming pension and health
care liabilities, it seems unlikely that in the short-term
there will be a reversal of the reflationary path that western
governments are currently following.

In addition to these fundamental factors which are favorable
to gold prices, there is the development of strong investment
forces, which could also support the long-term price of gold.
Recently, a gold bullion certificate has been introduced for
trading on the U.S. commodities markets. India is opening
a gold futures market and Chinese officials are considering
lifting the ban on individual trading on the Shanghai Gold
Exchange. Additionally, there has been a lot of talk about
the creation of an exchange-traded fund for gold. All of these
changes have the net effect of making it easier to buy gold?
something that has to be good for the price of the commodity.

The sentiment towards gold is clearly bullish with both investors
and speculators viewing gold as a store of value, particularly
given the decline of the U.S. dollar. At the present time,
there is a high level of speculative interest in gold relative
to historic norms. This speculative interest could, in the
short-run, put some downward pressure on gold prices if speculators
decide to take their bets off the table and cash out at a
tidy profit.

With a weak U.S. dollar, renewed speculative interest in gold,
elevated debt levels and loose monetary policies (and no end
in sight to these conditions), the fundamentals are extremely
strong for gold prices remaining above $370 U.S. for some
time.

Investors can either participate in the gold market by buying
the commodity directly or buying shares in companies that
produce gold. Historically, the equities of gold producers
move 4% for every 1% move in the price of gold. One stock
to consider is Barrick Gold Corp. (ABX) which, while it has
faced declining production and rising cash costs, is currently
developing four projects with high growth potential. Barrick
is the second largest gold miner in North America, producing
5.7 million ounces annually at an average production cost
of $175 per ounce. The company also has $1 billion in cash
on the balance sheet and no debt. These factors coupled with
the fact that the shares of Barrick are currently trading
at a significant discount to its peers, makes it an attractive
stock to consider.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article